Spring is normally a busy time for house hunting, which makes it a busy time for starting and renewing mortgages. Here are four ways to save money on what’s likely to be your biggest lifetime purchase:
1. Use your tax refund.
Some lenders allow homeowners to make a penalty-free prepayment of up to 20% of the original mortgage principal on the mortgage anniversary date or on any payment date throughout the year. The amount you can pay down will be outlined in your mortgage contract. If you’re expecting a tax refund, or have received one, this is a great way to use it. These prepayments go directly against the mortgage’s outstanding principal. A $5,000 prepayment made at the start of the fifth year of a $100,000 mortgage at 6% will take more than two years off the 25-year repayment schedule and reduce the total interest cost by more than 12%.
2. Index your payments to your income.
Many lenders will allow you to increase your regular mortgage payment by as much as 100% per year (as long as it doesn't exceed the prepayment number). So, if you get a raise at work or reduce your household expenses, consider directing that extra cash flow to your mortgage. Even small amounts make a big difference over time. For example, a $30 increase in the monthly payment on a 6% $100,000 mortgage can take 2 years off your loan payments and cuts the total interest cost by 11%.
3. Accelerate your schedule.
If you currently pay monthly, consider switching to accelerated biweekly or weekly payments. This strategy produces the equivalent of one extra monthly payment each year. The effect is similar to compound interest, only in reverse. Each over-payment reduces the loan. That reduces the interest due for the next payment, creating additional principle repayment, which in turn pays down the balance of the mortgage. For example, in some cases you may be able to knock four years off a normal 25-year repayment schedule and reduce the total interest cost by almost one-fifth.
4. Renew smart.
When your mortgage comes up for renewal, you have the opportunity to pay down as much of the principal as you want, with no penalty. Consider the following strategies:
- Ensure you still have the right options and mortgage fit.
- Reduce your amortization. If your previous mortgage was amortized over 25 years, for example, choose a 20- or 15-year amortization. Your payments will be higher, but you’ll pay less interest in the long run and be debt-free sooner.
- Keep your payments level. You may be looking forward to seeing your regular payments go down, since you’re renewing for a smaller amount. Unless you really need the extra cash flow, try to keep your payments at their previous level — your debt will disappear more quickly. Professional advice can help you determine the most effective way to pay down your mortgage sooner — freeing up cash for your other important goals and dreams.
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